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Sabotaging Employment: The Unemployment Insurance Fund

Monday, March 16th, 2015

In 2013 we published an article in the Labour Market Report outlining how the Unemployment Insurance Fund (UIF) in South Africa encouraged unemployment rather than solving the problem. This article supplements the earlier one, giving the latest figures to illustrate this problem.

UIF financials in a nutshell

 

History of the UIF

The UIF is a product of the Great Depression. It had its origin in a Cabinet meeting in 1932 and came into operation in 1937.<0} Although the fund’s contributors and beneficiaries were strictly limited at first, like all welfare projects unchecked by the market, it grew markedly over the years.

Initially there were several funds, each fund established for a different industry. In 1967, under a new Unemployment Insurance Act, the various funds were consolidated into a single fund. The beneficiaries kept growing – not only in numbers, but also in terms of new beneficiary categories. Maternity benefits were already added in the 1950s and certain adoption benefits followed from 1988 onward. After the political reform of the 1990s UIF contributions and benefits were extended to residents of the homelands and black people in general.

During the 1990s the fund’s financial position deteriorated until it was technically insolvent. The present Unemployment Insurance Fund in South Africa was established by the Unemployment Insurance Act (No. 63 of 2001), which further expanded the fund’s scope of benefits and at the same time turned around its financial position.

With the taxman at your side

In 2002 it became the task of the South African Revenue Services (SARS) to ensure that employers paid over contributions to the UIF.

With SARS’ assistance, the fund’s revenues grew rapidly. Today, the fund’s accumulated surplus is about R72 billion. In 2014 the UIF paid out only 47% of its income from contributions (about R15 billion) in benefits (R7,1 billion). This ratio is the rule rather than exception – only in one year, namely 2010, did benefit payments exceed the 50% mark of contributions. It means that the fund is consistently collecting more than double the amount needed.

Who suffers when the UIF over-recovers in the above way?

Mandatory contributions to the UIF currently equal 2% of every employee’s salary, subject to a cap of R297,44 which is reached when an employee earns R14 872 per month. One-half of the 2% fee for each employee is supposed to come from the employee and the other half from the employer. However, this division of the fee into two equal parts – as if the employer and the employee shared the burden of unemployment insurance – is a red herring. The full 2% is what the employer is prepared to pay to employ labour. Because it has to be paid over to the UIF, it lowers the total remuneration available in the economy, hence inhibiting additional employment. Because the UIF is over-recovering fees, employers can offer fewer people jobs and/or the remuneration of existing employees is less than it could have been otherwise.

UIF benefits

How the UIF’s over-recovery stifles employment

If the UIF had levied just half its fees in 2013/14, it would have left R7,5 billion in the hands of employers and employees in South Africa, yet would still have a gross surplus of almost half a billion rand. The over-recovery of R7,5 billion during 2013/14 is the equivalent of –

  • 276 000 farmworkers employed at the minimum wage of R2 275 a month;
  • 157 000 entry-level employees employed at R4 000 a month; or
  • 50 000 mineworkers employed at R12 500 a month.

But it is not only at a macro level that the UIF’s enormous over-recovery has obvious incidental costs. Consider a hypothetical medium-sized organisation with 50 employees, where 30 earn an income exceeding the contributions cap and 20 earn an average of R7 000 a month. Here the total UIF levy amounts to just under R12 000 per month. Halving UIF fees would free up approximately R6 000 per month that the organisation can spend on an additional employee.

In light of the UIF’s decades-long run of substantial over-recovery, it seems appropriate to conclude that the UIF actually contributes directly to unemployment.

The amendment bill transcends insurance

The logical route for the UIF is therefore to lower contributions drastically and to gradually erode the large accumulated surplus for the benefit of the labour market in South Africa. In contrast with this logical option, the current Amendment Bill on Unemployment in fact envisages expanding benefits to unemployed people and the fund’s mandate.

The 2014 amendment bill was written with a view to expanding the fund’s mandate beyond insuring people against unemployment with the fees levied. In terms hereof, the UIF will in future also finance ‘job creation’. While the current Act does – at best – hint at such a capability, the bill goes much further. The proposed amendment to section 5 of the Act would explicitly enable the fund to arbitrarily expend money for any purpose that could even vaguely be defined as ‘job creation’.

In an accompanying memorandum to the 2013 bill, it is noted that the fund already finances housing developments in North West. These activities differ from the proper purpose of the current UIF as defined in section 2 of the Act, which is simply to enable employees who have contributed to the fund to claim benefits if they become unemployed.

In fact, by expanding the UIF’s mandate to fund ’employment promotion projects’, the fund will become an institution that finances both employment and unemployment. Neither of these corresponds with the core objective of insurance.

Should the bill be passed, we are also likely to see other wasteful employment creation exercises, similar to the R2 billion bond that the UIF placed with the Industrial Development Corporation (IDC) in 2010.

Conclusion

Unemployment insurance in South Africa resembles insurance less and less, and a welfare trap and a drain on the economy more and more. The UIF flourishes at the expense of employees and employers. As is typical with tax systems, there is no intention of lowering levies if they are higher than necessary – rather, the institution’s mandate becomes extended to the extent that there is a surplus of funds.

Far be it from us to say that there is no place for unemployment insurance, but good unemployment insurance should avoid over-recovery and extravagant interventionism and focus on its core objective.

Incidentally, there exists a rich tradition of exactly this sort of unemployment insurance in the now almost forgotten, but once thriving mutual aid and friendly society organisations which reached a high point in many Western countries in the early 1900s. Unfortunately, over the past 150 years the modern welfare state has been highly successful in crowding out exactly this sort of private, non-profit initiatives, replacing them with bureaucracies like the Unemployment Insurance Fund which, ironically, ensures unemployment.

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